Increased Borrowing Raises Global Equity Markets

Yesterday, the New York Stock Exchange (NYSE) opened its doors after two months, albeit with a lower capacity (25%). London and other major stock exchanges have yet to open. Across the border in Canada, we saw bank profits plummet year over year (RBC, BMO, Scotiabank), as they book greater expected future loan losses. However, most of these expected losses had already been priced into the market.

The markets are being fueled by investors searching for yield, a pattern that has not changed for much of the last decade. Treasury yields are very low (zero and flirting with negative), pushing investors into equity markets. Government spending has been rampant and ongoing, as they look to support their citizens. Government interest rates have also fallen and they are issuing bonds that investors are buying. Investment grade companies are borrowing to replenish cash flow and pay down lines of credit (e.g. Boeing & Apple). Refinitive Data reported that $1 trillion has been borrowed this year (more than the total in 2019).

As we have written before, we are only at the beginning of the ‘restart’ phase and while we are also somewhat optimistic, there will be more twists and turns in the road ahead, including a possible second wave of infections. There is also the ongoing geo-political tensions, including China and the US, which we continue to monitor closely…

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